Tag Archive for governance

S166 uncovered: Why £4m was added to advisers' FSCS bill – A Salient Tale

A stockbroker failed leaving a thousand unresolved claims to the Financial Services Compensation Scheme worth upwards of £4m. Professional Adviser reveals the findings of a regulator-ordered skilled person review into what went wrong… 

Resources Global Professionals (RGP) was instructed to carry out a skilled persons review of City Equities by the Financial Conduct Authority (FCA) under section 166 (s166) of the Financial Services and Markets Act 2000.

It carried out the review during July and August 2013 – just two months before City Equities entered administration and was placed in default by the FSCS.

The findings detailed below are from a copy of the draft report RGP compiled of its s166 review, which according to the report cost £32,289. 

Directors asleep at the wheel

The report's appraisal of the firm's directors is scathing – that they simply didn't understand their regulatory responsibilities while in charge of a firm investing millions of people's money.

“The firm's senior management oversight and risk control is reactive to events and is inadequately resourced and the current senior management, individuals holding CF1, either do not have the competence or experience to undertake their role or in the case of one director is not involved with the business on a day to day level,” the report stated.

The firm's two directors admitted they were”not competent” in the senior management systems and controls (SYSC) rules, knowledge of the FCA principles, the code of conduct for approved persons or knowledge and understanding of the financial resources rules, according to the draft report's findings.

It is unclear whether further versions of the report were ever produced.

You're hired!

Not only did the directors not know what they were doing in dealing with compliance, nobody else at the firm had a clear idea of what they needed to do either, according to the report, as it had no up to date job descriptions against which to assess the competence of new directors, senior managers or key roles to which the firm was seeking to recruit.

Compliance chaos

According to the report, City Equities' senior management staff and organisation chart showed Joe Egerton, CEO of his own firm Ignacity, as head of compliance.

But the report stated that there was no contract of employment or contract for services between the firm and Joe Egerton personally.

The firm had submitted to the FCA to register Egerton's firm Ignacity as compliance officer, money laundering reporting officer and CASS oversight officer, with Egerton supposedly fulfilling those roles, it said.

But as the report points out, SYSC rules and ESMA guidance indicate that an”individual natural person” should be appointed to oversee compliance.

City Equities failed to demonstrate”why it believes a corporate entity can hold the roles” of compliance officer, money laundering reporting officer and CASS oversight officer.

In any case, the report found significant reliance was placed by the directors on regulatory and compliance advice provided by Egerton.

However “no evidence was provided to demonstrate that the firm had carried out any fit and proper checks or competence assessment on either Ignacity Ltd, its directors or on Joe Egerton”, the draft report stated.

A damning assessment of City Equities' compliance failings dominate the report, in which Egerton gets his own section.

Egerton was not registered by the firm with the FCA as compliance officer at the time of the skilled persons' review, according to the report.

A draft contract between Ignacity and City Equities was only dated 10 July 2013, the report said. Egerton states on his Linkedin profile he had been head of compliance at”a small City stockbroker” firm since August 2012.

No other evidence of any formal contract for services between Ignacity and City Equities was found, according to the report.

The report also found”no evidence that there is any recent or up to date risk assessment or compliance risk assessment of the firm”, or even a risk assessment or compliance document.

Also absent was a work plan to address risks identified in a risk assessment or to carry out a proactive investigation, or to anticipate and resolve potential compliance issues or problems arising from the sale of the business in 2011-2012, or the dramatic decline in the firm's business.

“The compliance function appears to be reactive to events only,” the draft report said.

The firm's compliance manual included reference to a financial promotions process but the manual was described as”very brief and significantly out of date”.

Overall the detail provided on financial promotions was”inadequate in setting out robust and clear control processes given the activities of the firm”, the report said.

The skilled persons review also found there was”no clear evidence that the compliance department has reported on key monitoring, risk and activity areas to the directors in a formalised or structured manner”.

“There was a lack of formal compliance management information that is escalated to the board,” the report said.

The last internal monitoring report on suitability that the skilled person's review could find in August 2013 was dated July 2012.

This report evidenced that a number of calls were assessed and that the monitoring highlighted a number of issues such as concerns and risks with adherence to front office sales procedures where clients are being advised to sell a share, regulatory errors, breach of sales processes and the need for know-your-client updates or identified know-your-client shortcomings.

There was no evidence, however, as to how the outcomes of this report were progressed and what monitoring, if any, was undertaken on suitability in the period since July 2012, according to the report.

Egerton claimed that a new compliance programme had not yet been able to be implemented – but the skilled person's review found no specific evidence of what this new programme had intended to entail.

“The position with the firm using an external compliance consultant has also not appeared to have delivered the required outcomes and controls,” the report said.

By not having a”competent” person in the roles of compliance officer, money laundering reporting officer and CASS oversight officer, City Equities was in breach of FCA rules, it concluded.

Professional Adviser contacted Egerton and put the issues raised in the draft report to him.

He claimed that except between October and December 2012 he was”only a consultant whose advice was regularly ignored” by City Equities, despite stating on his Linkedin profile that he was”from August 2012 to August 2013 acting head of compliance for a small City stockbroker”.

The draft report was”factually wrong” on”a number of points”, he said, but declined opportunities to explain how, or provide evidence.

He said the report's authors”had not been given documents and information that they should have been by another person who had that responsibility” that would show his compliance practices.

“The problem with the firm was not that it was not being told what it needed but that it rejected advice,” he said, adding that the report is”inaccurate”.

Ownership woes

The firm's main owner admitted he had no detailed knowledge or understanding of FCA Principles or key FCA rules. He relied on the directors and on Egerton for guidance on these matters, the report said.

The owners also had”very little understanding” of the UK regulatory regime and its requirements and”in the lack of competent guidance” have been unaware of the impact of some of the actions they have taken, the report said.

Quality of advice

Despite all of the above, the skilled person's review found that the standards of client advice based on the sample undertaken were”generally suitable or appropriate”.

However, some 1,000 people have taken claims to the Financial Services Compensation Scheme – at a total value of some £4m.

The skilled person review found no unsuitable cases in its review sample, but of the 45 cases reviewed nine were deemed unclear and at least one of these cases was highlighted as potentially unsuitable.

“There was evidence from the firm's complaints records and internal monitoring in 2012 to suggest that a wider review of suitability for an earlier period might identify wider legacy issues,” the report said, adding that such a wider review was outside the scope of its investigation and report.


If you want to have your compliance division or department independently reviewed, please contact us on 0207 097 1434 or email info@complianceconsultant.org

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Source: http://www.professionaladviser.com/professional-adviser/feature/2433399/s166-uncovered-why-gbp4m-was-added-to-advisers-fscs-bill

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Now It’s Getting Personal: The FCA and Personal Conduct Authority Compliance Evidence Requirements

In The United Kingdom Financial Services regulatory tumult, 2013 was a tipping point regarding the UK regulator the Financial Conduct Authority (FCA), because for the first time it pursued more civil and criminal enforcement action against individuals than firms. A big change, that a lot of senior managers and directors still appear have to grasp because of this emerging regime, that is definitely being built worldwide post-crisis, is the growing requirement of them to have the ability to manage their own personal regulatory risk. Although it might appear to be an additional and unnecessary burden which adds one more worry bead for already stretched senior executives nevertheless the growing practical truth is that the active acknowledgement and managing personal regulatory risks is the most suitable possible insurance policy for anyone when regulatory issues arise.

Obviously senior managers have got a duty to develop their firm being compliant and similarly must be recommended to demonstrate execution of their personal regulatory obligations and accountabilities. As part of the new individual’s core competency being in position to manage their own individual regulatory risk brings into play many different elements for consideration:

  • Clear illustration showing effective performance of responsibilities could be a unique and different angle to the application of job descriptions as part of the internal environment. It is actually clear the fact that the companies producing the job description into the future must make sure they are significantly more detailed compared to those currently used, and also for the protection of both individual and the firm it is important that every regulatory criteria, degrees of and matrix of responsibilities, including company expectations are included. In the future, as a daily part within the handling of the firm, senior managers will routinely need to gather and store evidence to indicate the way they individually discharged all of their obligations and responsibilities. When their role changes they’ll have to perform an intensive documented hand-over and acceptance from the incoming manager to be certain that all concerned have managed their personal regulatory risk adequately. It could possibly easily be viewed as a cottage industry but the increased a higher level documentation regarding job descriptions will end up a significant part of enabling senior managers to demonstrate the correct performance of their responsibilities.
  • Increasing and developing knowledge and awareness not merely with the changing regulatory environment but additionally in the implications of those changes. Participating in a constantly evolving and rolling regulatory training programme or undertaking a structured institute led CPD course could possibly be another. Failure to remain “on the ball” may lead to a significantly increased possibility of enforcement action for almost any unprepared or unaware individual and they are almost certainly going to have the full brunt of supervisory enforcement. In such a circumstance and a senior manager eventually ends up not being banned as an element of any enforcement action, it is actually highly likely the fact that this individual who has “only” been fined is ever going to work again in any senior capacity in virtually any financial services firm.
  • In establishing and developing any individual personal vault or store of evidence brings along with it IT security, access and usage issues, that firms need to identify and form policy. All senior managers would be smart to build and maintain their very own individual evidence to demonstrate the total and complete discharge of their regulatory obligations, and this must be portable so that they can be capable to call upon the data at any stage of litigation in the future. For the quantitative elements this is certainly going to be a relatively simple process but there are actually often challenges when culture is added into the mix. One quick win may very well be to accumulate all board along with meeting minutes that provide verification of the dispute and engagement because of the individual. For any appreciation of the scope of the evidence that should be gathered, senior managers could check out the Financial Stability Board’s consultation paper “Increasing the Intensity and Effectiveness of Supervision”, which put together a summary of “indicators” for senior managers to which they can demonstrate compliance and a good culture within the firm.

There are many indicators connected with a sound risk culture which need to be considered collectively as well as mutually reinforcing; taking a look at each indicator in isolation will neglect the multi-faceted nature of risk culture. These indicators include:

  • Tone from the top: The board of directors and senior management are definitely the starting place for setting the financial institution’s core values and risk culture, and their behaviour must reflect the values being espoused. This should need the leadership systematically developing, monitoring, analysing and assessing the culture inside the financial institution through effective governance measures for example policies, procedures, internal attestations and under-managers performing their own individual assessments.
  • Accountability: Successful risk management requires employees at all levels to comprehend the core values within the institutions’ risk culture together with its approach to risk, have the ability of performing their prescribed roles, and also be mindful that they will be held accountable with regard to their actions pertaining to the institution’s risk-taking behaviour. Staff acceptance of risk-related goals and related values is essential.
  • Effective challenge: A good risk culture promotes a place of effective challenge whereby decision-making processes promote an array of views, support testing of current practices, and stimulate a positive, critical attitude among employees and an environment of open and constructive engagement.
  • Incentives: Performance and talent management should encourage and reinforce repair of the financial institution’s desired risk management behaviour. Financial and non-financial incentives should secure the core values and risk culture at all amounts of the financial institution.

They are usually further enhanced by other messages for senior management conduct including;

  • Being committed to establishing, monitoring and sticking with an excellent risk appetite statement that underpins the financial institution’s risk management strategy and is integrated with the overall business strategy.
  • Developing a clear view of the risk culture that they aspire regarding the financial institution, systematically monitor and evaluate the prevailing risk culture and proactively address any identified areas of weakness or concern.
  • Promote through actions and words a risk culture that expects integrity and a sound approach to risk. The board and senior management promote an open exchange of views, challenge and debate, including making certain all directors have the tools, resources and details to execute their roles effectively, particularly their challenge function.
  • Engage mechanisms for instance talent development and succession planning, that will help to reduce the influence of dominant personalities and behaviours.
  • Systematically assess if the espoused values are communicated and adhered to by management and staff at all levels to make certain that the “tone at the middle” and through the entire institution is the same as the “tone at the top”.
  • Employing adequate mechanisms positioned to evaluate whether the risk appetite statement, risk management strategy and overall business strategy are clearly understood and embraced by management and staff at all levels, and effectively a part of the decision-making and processes of the business.
  • established a compensation structure that supports the institution’s espoused core values and promotes prudent risk-taking behaviour.
  • Create a clear comprehension of the standard and consistency of decision-making through the entire business, including how decision-making is in conjuction with the financial institution’s risk appetite and the business strategy.
  • Provide and analyse clear thoughts about the business lines thought to pose the maximum challenges to risk management, for instance unusually profitable areas of the business, that are subject to constructive and credible challenge with regards to the risk-return balance.
  • Monitor how fast issues raised with the board, supervisors, internal audit along with other control functions are addressed by management.
  • Implement and embed clear approaches to be sure that any failures or near-failures in risk culture, (internally or externally), are reviewed regularly (at least annually) at all levels of the organisation and therefore are described as an opportunity to strengthen the financial institution’s risk culture and make it far better.
  • Analyse and articulate lessons learned from recent in addition to past errors which can be viewed as an opportunity to strengthen the firm’s risk culture and to supply a catalyst for certain changes into the future.

One last point on the maintenance of personal evidence to indicate the compliant delivery of regulatory obligations concerns intellectual property. Whenever a senior manager changes firms it really is entirely reasonable that he or she are able to retain the suite of documents to allow for their compliant behaviour, but given that at least several of the documents may very well be business-sensitive, and be the intellectual property of the firm, sensible arrangements will have to be manufactured to enable the senior manager gain access to the documents under certain circumstances whenever they are not necessarily being employed by the firm.

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Working with a Local Authority on setting up a challenger bank, is interesting and rewarding. There are a number of challenges though, and these are mainly around the differences in jargon and the interpretation of the regulator’s needs …. and assumed potential shortcuts.

Challenge? Yes, but straightforward and in some ways refreshing.


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Big Business Simply Fail Their Clients

Today (10th December 2012), another big organisation suspends its salesforce in the run up to RDR because they are not sure everything is in place, stating; ‘Ahead of the implementation of the RDR in January we are taking the time to consider the right solution for all our stakeholders.

Santander said that it will suspend its 800 investment advisers while they undergo an ‘intensive bespoke training programme’ but has not outlined a date for their return.

A spokeswoman for Santander reported ‘As part of this process it was identified that our advisers require additional support and training to meet the expected standards. We will therefore be undertaking an additional intensive bespoke training programme. We apologise to customers for any inconvenience this may cause them.’

Recently, the Nationwide Building Society had suspended offering pensions advice due to uncertainty around the RDR readiness of its pensions proposition. Guy Simmonds, Nationwide head of product, protection and investments, said the Society hoped to have an RDR-ready pension proposition in place by early 2013. He said that;‘We have had to sacrifice the pension proposition at the moment,’ he said. ‘Given the regulatory uncertainty on pensions we wanted to confirm what our requirements were.’

Any Nationwide customer requiring pensions advice will be referred to an independent financial adviser for the time being, although the building society is planning to recruit a further 100 advisers next year.

Many retail advisers will be in a similar situation, however it is incredulaous that these “big boys” have made it so far and yet still failed to get it right.

The fundamental flaw on all of these businesses will inevitably be that their strategy was flawed. There was no sensible or robust planning done from a strategic point of view in the preparation for the RDR, and ultimately, as this truth dawns on them, heads will roll.

Let’s consider the desired outcomes of the RDR as set out in the Discussion Paper in 2007 (DP07/1) and these are summarised as;

  • an industry that engages with consumers in a way that delivers more clarity on products and services;
  • a market which allows more consumers to have their needs and wants addressed;
  • standards of professionalism that inspire consumer confidence and build trust;
  • remuneration arrangements that allow competitive forces to work in favour of consumers;
  • an industry where firms are sufficiently able to deliver their longer term commitments and where they treat their customers fairly; and
  • a regulatory framework that can support delivery of all these aspirations and does not inhibit future innovation where this benefits consumers.

To address these, the FSA have drawn up success indicators, to include;

  • Indicator A – Consumer understanding of advice channels
  • Indicator B – Firms adhere to the ‘new’ financial advice landscape
  • Indicator C – Advisers meet required standards on professionalism
  • Indicator D – Firms sell fewer ‘commission’ driven products
  • Indicator E – Consumer perceptions of the market improve
  • Indicator F – Fewer unsuitable sales are recorded
  • Indicator G – Improved product persistency
  • Indicator H – Firms’ solvency and profitability improves
  • Indicator I – Unintended consequences of the RDR do not materialise or are mitigated away

It would appear that these measures that will be applied post-RDR have been ignored by many firms, overtaken by the more basic requirements that everyone in retail have been living and breathing for the last 18 months concerning their propositions and charging arrangements.

It would seem that all these wonderful organisations that protest to “put our customers first”, “run by our customers for our customers” and other such slogans, have actually forgotten to include their clients in the actual strategy setting process, a fundamental move in all strategy setting.

In November 2011, the FSA reported on a survey conducted in 2010 where they asked consumers about their financial decision-making when purchasing investment products. This was a large-scale consumer survey involving 7,306 respondents, covering a wide range of consumers with different experiences of the retail investment market, from those that have recently engaged with the market to those that have never purchased a retail investment product.

The survey found that there was considerable confusion about whether the advice consumers received on purchasing retail investments was single tied, multi-tied, whole of market and/or independent. In particular, the research found the following:

  • There was a large proportion of respondents – both recent purchasers (39%) and non-purchasers (42%) – who either did not know the status of their adviser or who gave an ‘incorrect’ combination of answers to the questions:
  • Did you understand your adviser to be an independent financial adviser?
  • Was your adviser able to give advice on financial products from all companies, from a limited range of companies, or from a single company only?

Furthermore, of those ‘recent purchasers’ who reported that they received multi-tied advice, 67% went on to report that this advice had also been independent and a further 7% did not know whether or not it was independent.

The same misunderstanding occurred much less among those receiving single-tied advice, where only 34% also reported that they received independent advice and a further 19% did not know whether or not it was independent.

With such high levels of public confusion, it may have been prudent to runb your own focus groups, opinion groups, surveys and provide newsletters to your client base to engage them on the changes, discover their needs and wants, inform them of their bank or organisations changes and reasons why, and what the company vision was developing into – with their help. This would then give them excellent PR post-RDR when published alongside the FSA (or FCA/PRA) success indicators.

With the use of Social Media today and the economic climate forcing everyone to look at their spending habits and critically their costs of living, it would seem that change management has not been effectively managed.

Where most companies fail, one or more of the following have not been thoroughly implemented, such as;

  • The case for changing was not made to internal and external stakeholders sufficiently or credibly: regulatory changes specifically can unnerve people if they don’t fully understand not only the change but WHY the change is necessary.
  • New skills and thought processes were not thought through sufficiently to provide comfort to management that they were correctly embedded.
  • There was little support for change from any focus groups or external customer panels to gauge the changes or their impact;
  • Task forces or project groups were not working cohesively;
  • The vision or company mission was not clearly articulated and not cascaded in unison by senior management across the business;
  • People were not engaged in the process changes, they were dictated to and as such had no personal ownership or pride.

These areas all provide failure from the three “learning by” methods (learning by doing; use and failure) which if ignored leave the whole change process to chance and in most cases it turns to a ball of chalk.

The result of what we have seen recently is that these organisations will lose large amounts of business in the meantime and they will lose a large proportion of those customers permanantly, as the IFA world are a lot better prepared to provide a suitable service for all levels of investor.

CEI Compliance have consultants and trainers available to manage change in any size of organisation covering governance, compliance and risk. We have provided pre-RDR preparation to companies of all sizes. Call us on 0800 689 9 689

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